The System

David Bach's The Automatic Millionaire is a quick personal finance read that I recommend to anyone who wants to spend a couple of hours receiving simple, useful advice.  There are a few major points to his method, all of which are quite reasonable and have merit.  There is no reason not to read this book if you want more control over your personal finances, but I will sum it up for you anyway for those of you who will not.  There are two really key points that I like from his book that I will discuss below.  

1. Automation

The first and largest point of this entire book is that you can and should do your finances automatically.  Bach suggests that by automating where each bit of your income goes before you receive it, rather than getting a lump sum every time you are paid, you have taken the biggest step towards financial stability you can.  It seems a little overblown to say this is the way to fix your finances, but he does have a point.  For many people receiving a paycheck means that it is time to go shopping or otherwise spend money, by automating the money into your bank account and directly to your specific bills you avoid some of that temptation.

 The suggestion is not supposed to be to never spend money on fun things, but that you have a specified amount of money for everything, including extra money for fun things.  His claim is that if you do not have a specified amount you are saving each week or month (automatically), then you will end up with nothing to save each time you are paid. This is pretty reasonable, and something many of us can benefit from hearing from time to time.  Simply put, money is best managed when you know exactly what you are using it for, and do not even get to consider using it for anything else, which makes a lot of sense.  

2. The Latte Factor

In the book Bach talks about a class he is teaching where a woman says she does not make enough money to save anything.  He asks her daily routine finds out she spends at least $5 each day on a latte and muffin during her break from work.  He shows her that if she saved the $5 instead of buying the latte and muffin each morning she would save $948,611 over 40 years.  This is calculated from ($5 x 7 days = $35/week = about $150/month.  By investing $150 a month for 40 years, with a 10% annual return, you reach $948,611, or almost an "automatic million".  This book is several years old now, though it is still a fixture among personal finance books, but one significant change has been that interest rates have dropped far below the 10% mark since its writing.  So now people could suggest that this "Latte Factor" is less important, because it is so difficult to build savings with interest.  They have a point, but I am sure Bach would tell them that the method of saving $150/month by not getting daily lattes would still hold true, and still build them significant savings over the years.  This name is not supposed to suggest that no one should buy lattes, but that we all have everyday expenses that we do not think about that if saved would mean huge savings in the long-run.  He goes on to offer techniques to cut out your latte factors and other helpful hints, but this is one of the other main points, outside of the automation discussed above.  


I think that these two pieces of information are even more important today than they were at the time of the book's publishing.  Lowered interest rates certainly shrink his somewhat lofty estimates, but the principles remain solidly true.  His other major suggestion in the book is to stay out of debt, which is something most of us are told on a regular basis.  So ultimately I do recommend this book, albeit somewhat cautiously because the title is so sensational.